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The internal investigation of American International Group Inc. keeps turning up more problems, according to a New York Times article (here). Although the internal investigation is not yet complete, and the regulators and prosecutors are far from wrapping up their many probes, there is evidence that AIG's internal controls were easily evaded, and the company hid its control of at least two off-shore reinsurance companies, identified as Union Excess (Barbados) and Richmond Re (Bermuda). The company has until May 2 to file its annual report, which has already been delayed from mid-March and could be put off even further, although there would be a remote risk of delisting from the New York Stock Exchange if the delay becomes much greater. Speculation about the size of the charges arising from the various accounting problems uncovered has ranged as high as $8 billion from earlier estimates of $2.7 billion. The heat on former AIG executives to cooperate in the government's criminal and civil investigations is sure to increase once the internal review is completed and the regulators and prosecutors take center stage. (ph)

Arthur Andersen LLP appears to be nearing the end of its run as a litigant, perhaps its final acts as a legal entity. Tomorrow, the Supreme Court concludes its oral argument schedule for the 2004 Term with Arthur Andersen v. United States (earlier post here). The Andersen Reply Brief filed last week is available here, and the fight concerns the proper interpretation of "corruptly" under 18 U.S.C. Sec 1512. Today, Andersen was the final defendant to settle in the WorldCom securities fraud class action litigation that has resulted in payments by investment banks and Worldcom's former directors of over $6 billion (earlier post here). According to a Wall St. Journal article (here), Andersen agreed to pay $65 million, plus 20% of any funds paid out to its U.S. partners after the partnership is finally wound up. No indication in the settlement documents how much that could be, and there is a chance it could be a multiple of zero. Even a reversal of the criminal conviction, which would probably be the end of the criminal case because the government is unlikely to retry the organization, will not bring Andersen back. A sad end to a once-great name, at one time the best of the Big Eight accounting firms for those who remember back that far. (ph)

The National Association of Criminal Defense Lawyers (NACDL) recently conducted a survey that demonstrates that the attorney-client is definitely under attack. The results of the survey can be found on the NACDL website here.

The results are shocking to say the least. For example, one revelation of this survey is that " 87 percent of lawyers said that attorney-client privilege or work-product has recently been challenged; a shocking 25 percent by federal prosecutors, 15 percent by federal regulators, and 16 percent by an opposing party in civil litigation."

The executive summary of the survey also demonstrated that

"More than 47 percent of outside counsel surveyed indicated that their clients had personally experienced an erosion in the protections offered by the privilege and work product doctrine after Enron. These respondents were asked to describe their experiences; approximately 130 text responses were received. An overwhelming number of respondents—approximately 85 percent—reported that DOJ and the SEC frequently require "discussions" of waiver as part of "settlement" negotiations—in other words, in deciding whether to charge a company, accept a plea, or settle civilly. Lawyers reported: (1) that the results of internal investigations are routinely demanded; (2) that individuals are less forthcoming as a result; (3) that indemnification for legal bills and joint defense agreements are a thing of the past; and (4) that the climate is such that waiver is often offered before it is requested—at the cost of individual employees. "

This survey demonstrates the devastating effect of the erosion of the attorney-client privilege in the white collar context.

Have you had a case where the government gave federal "use" immunity to a witness, who happens to be an attorney, and then proceeded to turn the testimony of the witness over to a bar disciplinary committee? Is it fair play?

1. Should the government be required to notify the attorney-witness of this possibility prior to their testifying?

2. Does it make a difference that the immunity is being offered in a different forum?

3. Does it make a difference if it is the same DOJ attorney giving the immunity and then submitting the testimony to the bar?

4. Should attorneys be skeptical about client attorneys testifying as grand jury witnesses if their conduct, although not criminal, may have ethical implications to their licenses?

Maybe it is just that working on this blog has caused me to pay more attention to convictions, sentencings, etc., but does it seem that more lawyers are getting sent to jail? Here are two more who will enjoy time in FCI's:

(1) Stephen Alexander, an attorney and former major of Azusa, CA, was convicted of filing a false tax return for failing to report $200,000 of income (USAO press release here).

(2) Robert Claire of Boca Raton, FL, was sentenced to a 36-month term of imprisonment for embezzling $1.65 million from the estate of a client to prop up a company he operated, which of course eventually collapsed (USAO press release here).

The so-called "Booker-fix" found in HR 1528 is not going unnoticed. Doug Berman in his extraordinary sentencing blog has been discussing it at length including his mention of the United States Sentencing Commission opposition here.

"the federal criminal laws exert substantial influence over the nation’s economy and the conduct of U.S. commerce. Congress certainly recognized this through passing legislation such as Sarbanes-Oxley to encourage certain kinds of corporate executive behavior and discourage inappropriate and illegal behaviors. Before you begin any effort to re-legislate criminal sentencing, we strongly urge you to take the time and steps necessary to gather data from the business community regarding the current sentencing system and its ability to influence meaningfully the corporate behaviors that the Sentencing Guidelines are intended to affect. We suggest that as a part of that process, you should receive expert input from a wide range of sources, including the business community, regarding the likely impact of any new proposal."

And signing this letter to Sensenbrenner and Conyors are far from the typical groups one finds in opposition to sentencing issues. They are:

U.S. Chamber of Commerce, National Petrochemical and Refiners Association, Association of Corporate Counsel, American Chemistry Council, Business Civil Liberties, Inc. and the Corporate Environmental Enforcement Council.

AP just reported that the San Diego Mayor is going to step down. The timing is perhaps curious as a federal investigation is going on there. One has to wonder whether 1) someone is fingering him; 2) he is talking about others; 3) information is implicating him; or 4) whether the former judge is sick of having to deal with all the issues surrounding the city. Or just maybe it has nothing to do with the federal probe. Only time will tell. (see AP wires on Newsday for details).

Head of the DOJ Criminal Division, Christopher Wray, is leaving the Department of Justice to return to the law firm of King and Spaulding. According to the Atlanta Journal Constitution, Chris Wray was the youngest chief of the Justice Department's criminal division since the Kennedy administration. According to his DOJ bio:

"Christopher A. Wray was nominated by President George W. Bush on June 9, 2003, and confirmed by the U.S. Senate on September 11, 2003, as the 33rd Assistant Attorney General in charge of the Criminal Division. Prior to leading the Division, he was appointed by Attorney General John Ashcroft as the Principal Associate Deputy Attorney General in September 2001. Chris served as Deputy Attorney General Larry Thompson's ranking deputy, having joined the Department as Associate Deputy Attorney General in May 2001. From 1997 to 2001, Chris was an Assistant U.S. Attorney for the Northern District of Georgia in its Criminal Division. As a prosecutor in Atlanta, Chris handled a variety of federal cases and investigations, including securities fraud, public corruption, racketeering, murder-for-hire, arson, bank robbery, gun trafficking, counterfeiting, immigration, and others. Before joining the U.S. Attorney's Office, Chris practiced law in the Atlanta, Georgia office of King & Spalding, where he focused on white collar crime, complex civil litigation, and internal corporate investigations. He also served as a law clerk to Judge J. Michael Luttig of the U.S. Court of Appeals for the Fourth Circuit from 1992 to 1993. Chris graduated cum laude from Yale University in 1989 and received his law degree in 1992 from Yale Law School, where he served as Executive Editor of the Yale Law Journal."

Chris Wray will become the head of "special matters" at King and Spaulding. (see more in the Atlanta Jrl Constitution here).

The NYTimes reports here that David N. Kelley will be leaving as US Attorney for the Southern District of New York. It was this office and his administration that prosecuted cases such Martha Stewart, Bernard Ebbers, and Lynne Stewart.

Doug Berman on Sentencing Law & Policy has some interesting thoughts here (he has invited comments) on the conflicting plain error approaches of the circuit courts regarding sentences handed down before Booker in which defense lawyers did not have their crystal balls properly aligned to anticipate how to preserve a sentencing objection. Doug writes:

In some sense, the future development of plain error serves as an interesting test case for the true importance of national sentencing uniformity relative to other goals and interests. Federal defendants are, because of the different circuit plain error rules, clearly receiving unequal justice in the wake of Booker. But, though the consequences of unequal justice may be quite significant for individual defendants, the consequences may not be so profound for the entire system to merit Supreme Court correction. (It is interesting to speculate whether and how other institutions, such as Congress or the US Sentencing Commission, might intervene to clean up the plain error mess. But this would be pure academic speculation because, to my knowledge, neither body is inclined to address this issue in any way.)

In one sense, lamenting inconsistent plain error rulings is like complaining about the weather -- everyone does it because it's so unpredictable. The four-step test for plain error adopted by the Supreme Court in Olano and Johnson gives circuit courts two outs, if you will, to avoid granting a remedy: the error must affect "substantial rights," an undefined category, and that error must affect the "fairness, integrity, or public reputation of judicial proceedings," which strikes me as something akin to the Chancellor's boot. If you read enough plain error cases -- which is like plunging sharp needles into your eyes after a while -- one thing that becomes apparent is the aversion of circuit courts to granting new trials for errors that, while significant, should have been noticed and addressed much earlier in the process. It is as if the defendant is punished for the sins of counsel who did not call the error to the lower court's attention earlier, and appellate court's just don't like to grant a drastic remedy in that situation except in egregious cases (how's that for a clear standard).

What makes the sentencing cases different, and one reason why the hard line taken by the Eleventh Circuit is so problematic, is that the remedy is quite modest compared to the usual case requiring a new trial. The new sentencing proceeding could be as simple as a one line order from the district court: "Upon due consideration of all relevant evidence and circumstances, the prior sentence is affirmed." No need even for the defendant to be present, and perhaps not even a round of briefing from the two sides. Unlike other changes in constitutional interpretation that can result in convictions being overturned, Booker's revolutionary aspects are much more important for the future while the effect on past cases is not particularly drastic, at least with regard to requiring extensive new judicial proceedings. (ph)

Arthur Andersen's appeal of its obstruction of justice conviction in the Supreme Court will be argued this week, and as discussed in this excellent post on the SCOTUS Blog (here), the first team will be speaking to the court: Maureen Mahoney from Latham & Watkins and Michael Dreeben from the Solicitor General's office. SCOTUS Blog notes the rhetoric of the parties in their briefs:

At bottom, though, the rhetoric the parties employ tells the whole story. Andersen characterizes its conviction as an example of creative government lawyering that, if allowed to stand, will criminalize “common conduct undertaken without any consciousness of wrongdoing.” The government, in stark contrast, portrays Andersen’s response to Enron’s downfall as a unique and calculated attempt to convince its “employees to lay waste to vast troves of documents when a government investigation [was] viewed as highly probable.”

A good article from Legal Times, available on Law.Com (here), discusses the view of corporate counsel on the case.

My predictive abilities are worse than a coin toss, but I doubt there will be a unanimous opinion from the Court because the lower courts have struggled to explain "corruptly" in any coherent fashion. It is a term that defies any easy definition, and often opinions discussing the term say little more than "corruptly means to act corruptly." (ph)

CNN reports here that the US Probation Department plans to investigate whether Martha Stewart violated her "house arrest" by attending a Time Magazine dinner in which she was honored. Several things are noted here:

1. What more can an individual do who is on probation/house arrest then seek approval of places they think they should attend as work related? According to the CNN article, Martha Stewart did that here.

2. Why is someone having the probation department investigate her attendance? Don't they have better things to do with their time? Or is someone unhappy that Martha Stewart is getting so much favorable press despite the conviction on the government charges?

3. This is a perfect example of how white collar individuals are different. What is considered "work-related" to some may not be to others. In the corporate setting, a person's name may be the trade name that serves as the goodwill for the company. Does Martha Stewart need to be "seen" and "heard from" to let people know that the company is surviving fine despite the conviction setback?

4. Would Martha Stewart just be better off staying at home until the house arrest period is over? Because of the high-profile nature of this case, the fact that some people are unhappy that she continues to get favorable press, maybe she would be better off just staying clear until the time period runs. It is obvious that people are scrutinizing every move she makes, so maybe this is a good time to lay low.

(esp)

Addendum: Also see the comments of Doug Berman on his Sentencing Blog here.

The Washington Post presents a very compelling article here on who paidd for Rep. Tom DeLay's trip in 2000 to Scotland and England. They even seem to have the documentation in that the article states,

"The documents obtained by The Washington Post, including receipts for his hotel stays in Scotland and London and billings for his golfing during the trip at the famed St. Andrews course in Scotland, substantiate for the first time that some of DeLay's expenses on the trip were billed to charge cards used by the two lobbyists."

Several interesting things here:

1) Why is a newspaper doing the investigation as opposed to the law enforcement or others; and if others are investigating why is it taking so long - the alleged year is 2000?

2) Are we talking possible ethics violations, or could criminal charges be considered here? 18 USC 1346, the "intangible right of honest services," permits mail and wire fraud charges merely on a material, intentional, deprivation of honest services that uses an "interstate carrier," the mails, or the wires. It's an absurd statute that permits prosecutors incredible breadth to charge conduct that might normally not be considered criminal - conduct that is merely unethical. Although, some judges have appropriately dismissed prosecutorial charges that have been premised on mere unethical behavior.

3) The Washington Post states regarding DeLay that, "[h]e has also said he had no way of knowing that any lobbyist might have financially supported the trip, either directly or through reimbursements to the nonprofit organization." The "ignorant CEO defense"?

Three major trials are forthcoming in Georgia, all premised on alleged public corruption activity. The first is scheduled to start this coming Monday. The trial of Robin Williams, "Republican state lawmaker" is first up, followed by Charles Walker "Democratic state House member and senator" and then Linda Schrenko former "Republican state superintendent .... and unsuccessful candidate for governor." Reporter James Salzer provides an overview of these three upcoming trials here in the Atlanta Journal Constitution.

We discussed the charges here on Linda Schrenko and the indictment can be found here.

We posted here some comments on the opening by the defense in the Scrushy trial. But it is a fascinating how the defense is putting the FBI to the same test as they expect of the former CEO of HealthSouth. When questioned about the evidence gathering process, FBI Agent Kelly admitted to not knowing what everyone within the FBI was doing in gathering evidence on this case. The defense here was trying to show the selective evidence gathering process that was favorable to the government. The defense also managed to show how people "in charge" just can't follow every action of those working under them. A brilliant trial strategy move here by defense Attorney Parkman to bolster the defense argument.

If defense attorney Parkman had just left that statement "as is" and tied it up in final arguments he might have had more success with the comparison. But he chose to ask the next question -

"Then how can you say that Richard Scrushy ought to know what 50,000 employees are doing every minute of every day?"

This allowed the witness the opportunity to explain the difference between knowing what the top executives in the company were doing and what FBI field agents might be doing.

Defense Counsel has scored a few points here, but not as many as perhaps they might have been trying for with this witness. (See more in this AP story in the WSJ).

Serono S.A., the large biotech company, indicated in an SEC filing that it is preparing to settle an investigation of its U.S. subsidiary, Serono Inc., related to its sales of Serostim, a drug used to treat AIDS wasting, by reserving $725 million. Serostim is a human growth hormone, and can be used -- and abused -- by athletes. An earlier post (here) discussed the indictment of four former Serono sales executives related to alleged kickbacks given to doctors to entice them to write prescriptions for Serostim, a drug which costs $21,000 for a full treatment cycle. The sales push was dubbed "$6 Million in Six Days" -- catchy, but perhaps a little hard to justify under the anti-kickback rules. Serono S.A.'s Form 6-K (the foreign private issuer financial disclosure form here) states:

The company has taken a provision of $725.0m, in connection with the previously reported Serostim investigation. The group’s principal US subsidiary, Serono, Inc., received a subpoena in 2001 from the US Attorney’s office in Boston, Massachusetts requesting that it produce documents for the period from 1992 to the present relating to Serostim. As part of an ongoing, industry-wide investigation by the states and the federal government into the setting of average wholesale prices and commercial practices, other pharmaceutical companies have received similar subpoenas. These investigations seek to determine whether such practices violated any laws, including the Federal False Claims Act or the US Food, Drug and Cosmetic Act or constituted fraud in connection with Medicare and/or Medicaid reimbursement to third parties. Serono has cooperated fully with the investigation and continues to do so. Although no final agreement has been reached, the company’s discussions with the US Attorney’s office have advanced to a point where it is now appropriate to take a provision that management believes will be sufficient to cover resolution of the investigation related to Serostim. Serono is committed to meet the highest standards of ethical behaviour. The company participated in the setting of industry-wide codes of conduct, and has in place a rigorous compliance program.

A global settlement would likely involve both civil penalties, a criminal fine, and reimbursement of federal health care programs. The $725 million figure, if that turns out to be the final amount, would be among the largest settlements in the healthcare fraud area. The size of Serono S.A.'s reserve indicates that the case is much broader than the "$6 Million in 6 Days" program, and may involve inflated billings, a broader array of kickbacks, or other healthcare fraud violations. The U.S. Attorney's Office in Boston has specialized in these types of cases, including the $875 million penalty assessed TAP Pharmaceuticals related to the marketing of Lupron. Individual defendants from TAP Pharmaceuticals were found not guilty in the criminal prosecution. Let's hope Serono's ethical "behaviour" improves, too. (ph)

The trial of former Philadelphia Treasurer Corey Kemp and four other defendants on corruption charges has started to resemble a game at Veterans Stadium as tensions have risen with the jury still deliberating after being instructed last week. U.S. District Judge Michael Baylson interviewed each of the jurors separately on Wednesday, and apparently the subject of the judge's inquiry was a note sent out by one juror that another juror believes the FBI lied during the investigation and at trial. The wiretaps in the case, including one place in Mayor Street's office, were a bone of contention during the trial, and the defense questioned whether the prosecution of Kemp and the other four defendants, including two Commerce Bank executives, was brought to justify the extensive investigation undertaken by the FBI of Mayor Street's administration. The judge has refused to disclose transcripts from the juror interviews and sealed four notes sent out from the jury room. If the jury convicts, the juror interviews are almost certain to be a ground for a request for a new trial and an appeal.

Tension between the defense lawyers and Judge Baylson has gotten pretty high. A local observer mentioned that the lawyers are upset at Judge Baylson for what they perceived as his pro-government approach -- he is a former U.S. Attorney for the Eastern District of Pennsylvania -- including rolling his eyes when defense counsel examined witnesses and a hostile tone. At a hearing yesterday, the tension boiled over as defense counsel objected to an instruction given to the jury in response to a question, when Judge Baylson said that Kemp was acting in an official capacity, a point disputed by the defense. George Parry, Kemp's lawyer, said to the judge, "I don't know why you just didn't tell them to convict Corey Kemp . . . Direct a verdict of guilt. You ought to be the 13th juror." Later, when Judge Baylson reminded the defense lawyers that "I'm the judge," one defense lawyer replied, "And the jury." And you thought it was tough to be on the Phillies (or Eagles, Flyers, 76ers . . .). An article in the Philadelphia Inquirer (here) discusses the happenings in court. (ph)

U.S. District Judge Sim Lake rejected the government's request to begin the trial of Ken Lay on the severed bank fraud charges within the next two months. Judge Lake accepted the defense argument that an earlier trial -- and conviction -- would have a prejudicial effect on the jury pool because of the intense publicity it would engender. The two sides also agreed that the charges will be decided by the judge and not a jury, so the court will begin the bank fraud case as soon as the jury retires in the larger conspiracy case that also includes former Enron CEO Jeff Skilling and former Chief Accounting Officer Richard Causey. This is an interesting arrangement that essentially piggybacks the evidence (to the extent it may be relevant) from the conspiracy trial on to the bank fraud/false statement to a financial institution case, which involves Lay's uses of funds from loans to purchase additional Enron stock. For Lay, the timing of the separate trial means that he will have greater freedom to decide whether to testify in the conspiracy prosecution without the specter of a prior conviction hanging over his head if the earlier trial had gone against him. A Houston Chronicle story (here) discusses the judge's ruling. (ph)

The Financial Crimes Enforcement Network (FinCEN) filed a notice of proposed rulemaking to prohibit two Latvian banks headquartered in Riga, VEF Banka and Multibanka, from conducting financial transactions with banks in the United States because of possible money laundering activities at the banks. Under the USA PATRIOT Act, U.S. financial institutions can be required to take "special measures" against foreign banks or other institutions when there is a "primary money laundering concern" regarding use of accounts for money laundering. FinCEN seeks to adopt the "fifth special measure" which "prohibits or conditions the opening or maintaining of correspondent or payable through accounts for the designated institution by U.S. financial institutions."

According to the FinCEN release on VEF Banka (here), "The bank’s dealings with foreign shell companies, provision of confidential banking services, and lack of controls and procedures adequate to the risks involved, make VEF vulnerable to money laundering and other financial crimes. As a result of the significant number of credit and debit transactions involving entities that appear to be shell corporations banking at VEF, some U.S. financial institutions have already closed correspondent relationships with VEF." Regarding Multibanka, the FinCEN release (here) states, "Multibanka offers confidential banking services and numbered accounts for non-Latvian customers. Reports substantiate that a significant portion of its business involves wiring money out of the country on behalf of its accountholders. The bank has been suspected of being used by Russian and other shell companies to facilitate financial crime. A common way for criminals to disguise illegal proceeds is to establish shell companies in countries known for lax enforcement of anti-money laundering laws. The criminals use the shell companies to conceal the true ownership of the accounts and assets, which is ideal for the laundering of funds." (ph)

The defense in the prosecution of Richard Scrushy began -- after more rounds of legal wrangling -- by focusing on the lack of any documentary evidence showing that he was aware of the fraud at HealthSouth, with the first witness being an FBI agent, who would have to be considered hostile. This is the consistent theme underlying the "honest but ignorant CEO" defense, and the first issue raised by defense lawyer James Parkman was whether the FBI found any of Scrushy's fingerprints on documents related to the fraud. That type of forensic evidence is usually not an issue in white collar crime prosecutions, but it presents an avenue for the defense to emphasize that there is no physical evidence of Scrushy's involvement, and no damning e-mails or memoranda from him regarding the fraud.

Before the defense began its case, Judge Karon Bowdre refused to dismiss most of the charges, but did grant the defense motion by dismissing five charges, including one of the Sarbanes-Oxley Act certification counts that alleged Scrushy forced two HealthSouth officers, including former CFO Bill Owens, to sign false certifications. She also reserved ruling on 12 other counts relating to money laundering and obstruction, including one of the other Sarbanes-Oxley Act counts, but did not dismiss the count regarding the one certification Scrushy signed. In addition, the judge's frustration with the prosecutors rose to the surface again when she said the government's 155 page brief on the Rule 29 dismissal motion "makes the unabridged edition of `Les Miserables' an easy read" -- I guess War and Peace in the original will come with the jury instructions.

The court also dismissed the three perjury charges arising from the SEC deposition (bringing the total number of charges to 50 from the original 58), although the government has appealed that decision to the Eleventh Circuit. If the appellate court overrules the judge's ruling that the transcript is inadmissible (see prior post with ruling here), then the government will have to re-open its case-in-chief and present the evidence. That makes for some procedural difficulties, and no doubt would be an issue on appeal should Scrushy be convicted. Articles in the Birmingham News (here) and AP (here) discuss the beginning of the defense case and the judge's rulings. (ph)